An Interview with Josh Lerner

By TAP Staff Blogger

Posted on April 12, 2010


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Jacques Cremer of the Toulouse Network for Information Technology (TNIT) interviewed Josh Lerner this past December. They discussed Professor Lerner’s thoughts on the challenges of innovation over the next few years, patent reform, and his new book, “Boulevard of Broken Dreams.” Josh Lerner is the Jacob H. Schiff Professor of Investment Banking with Harvard Business School.
 

TNIT: You have done such a large amount of research on so many important issues that we are a bit at a loss when choosing where to begin. So let us begin by something totally unfair. In a very big picture way, what do you see as the biggest threats, challenges and hopes for innovation in the next few years?


Lerner: This is a great question. The biggest issue I see is something that has been little explored in economics research, but is nonetheless a very real issue: We are seeing today a cut-back in fundamental research on at least three levels. First, many corporations are shuttering basic research laboratories in favor of more targeted (and in the case of many firms, smaller) divisional research facilities that work on more applied problems.
 

The Federal government has adopted in recent years a much more focused strategy to their funding, no longer being willing to give open-ended, multi-year grants through agencies such as the Departments of Defense’s Advanced Research Projects Agency. And venture capitalists have responded to decreasing returns and falling fund-raising by demanding that their start-up companies have highly focused business strategies. While all these responses are doubtless rational ones, the broad social implications of this from a global perspective are worrisome, since economists have argued for decades that the returns to society of basic research are particularly high. While we are seeing the growth of research activities in developing nations such as China and India, it seems unlikely that either the rate of growth or sophistication of this research will be sufficient to make up for these cut-backs in the United States and elsewhere in the West.


TNIT: In your work on patents, including your widely cited book with Adam Jaffe (“Innovation and Its Discontents”), you have argued that the whole patent system should be reformed. Are you more or less optimistic than you were at the time on the possibility that such reforms will take place?


Lerner: There is both bad news and good news as we look at the experience of the U.S. in this regard: On the one hand, Congress has shown itself incapable of passing fundamental patent reform. Each time a bill appears to have momentum, the press of other business and the inherent conflicts between the pharmaceutical and information technology industries stymie its progress. This is quite discouraging.


At the same time, the Supreme Court has made a series of decisions that have addressed many of the key issues - not, perhaps, in the ways that Adam and I recommended in our book, but reasonably effectively. In the eBay, KSR, and related cases, the Court has raised the bar for patentability and also made it harder for non-practicing patent holders (also known as “patent trolls”) to effect their deleterious consequences.


TNIT: In your introduction on the economics of patents (on your website) you state: “The scope of patentable subject matter has traditionally not included fundamental scientific discoveries. A frequently invoked rationale for this omission is that many scientists care little for monetary rewards, and would consequently have pursued the discoveries in any case.” Do you agree with this view? And what are the implications to science?


Lerner: This question is a complex one. I am certainly not comfortable with drawing a line - as has been done in Europe - between technical and non-technical inventions, and only allowing technical inventions to be patented. It seems clear that both classes of inventions (technical and non-technical) should be patentable, since in both cases, the need (long articulated by economists) for incentives to innovate are important.


It is less clear how one should think about the patentability of fundamental scientific and mathematical discoveries, which have been exempt from patenting in most places of the world (indeed, in France, this exemption was codified in its very first patent code in 1791). One can certainly make a plausible case that such awards would fundamentally disrupt the nature of the scientific process, where one researcher tends to build closely on the works of another - indeed, works by Fiona Murray, Scott Stern and Heidi Williams suggests that patent protection in the life sciences has indeed disrupted the flow of scientific progress there. Moreover, scientists have such strong career-related incentives to publish that it can be questioned whether the added incentives of patents are needed.


TNIT: And can you tell us a bit what your new book, “Boulevard of Broken Dreams”, is about?


Lerner: Today, there is a keen awareness on the part of many governments of the need for “green shoots,” high-potential firms, which will lead to growth after the recession.


Meanwhile, the venture industry in many nations is on “life support,” struggling for survival. The industry has struggled to realize good returns from investments since the year 2000. Many traditional investors are questioning whether they should continue to provide capital to these funds. But giving the important role that venture capital has had in spurring innovation, it is natural to wonder whether there is a public role in ensuring the industry’s survival. Indeed, governments from London to New Delhi have announced venture initiatives in the past few months.


These steps might seem initially plausible. Entrepreneurship is a business in which there are increasing returns. To put the point another way, it is far easier to found a start-up if there are ten other entrepreneurs nearby. In many respects, founders and venture capitalists benefit from their peers. For instance, if entrepreneurs are already active in the market, investors, employees, intermediaries such as lawyers and data providers, and the wider capital markets are likely to be knowledgeable about the venturing process and what strategies, financing, support, and exit mechanisms it requires. In the activities associated with entrepreneurship and venture capital, the actions of any one group are likely to have positive spillovers - or, in the language of economics, “externalities” - for their peers. It is in these types of settings that the government can often play a very positive role as a catalyst. Yet, for every successful public intervention spurring entrepreneurial activity, there are many failed efforts, wasting untold billions in taxpayer dollars. The book explores this relatively uncharted territory, and highlights both what can go wrong and how the public sector can do better.


TNIT: Some personal and fun questions. At Yale, you majored in physics. Do you ever regret having not pursued a career in science or technology?


Lerner: Actually, I had already gotten the policy bug while I was at Yale, so did a major that combined physics with history of technology and lots of other stuff. This was definitely the right choice - they are way too many super-smart people in physics!


TNIT: Have you ever filed a patent?


Lerner: Not only have I have filed one, it has been awarded (US Patent no. 7,426,488). It took seven years before it issued, but is likely to die a premature death after eighteen months once the Supreme Court issues its decision in the Bilski case.


TNIT: On your web page at the Harvard Business School, there is a picture of you hugging a donkey. Care to tell us more about this?


Lerner: We have seven of them. We bought one, and the rest have shown up on our doorstep. One thing I have learned, though, is that a donkey is a liability, and not an asset!


TNIT: Just quickly respond to the following opposites: Touch Type or Secretary?


Lerner: Two-fingered hunt and pecking.


TNIT: Facebook, LinkedIn or address book?


Lerner: Linked In.


TNIT: JSTOR or paper copies in library?


Lerner: JSTOR definitely.


TNIT: What really would need to be invented if it didn’t exist already?

Lerner: BlackBerry.


TNIT: And what really needs to be invented which does not exist already?


Lerner: If I knew this, I would be rich! My favorite would be a car that drives itself.


TNIT: Coffee or mineral water?


Lerner: Decaf Earl Grey.


TNIT: Twitter or not?


Lerner: Yes, but in a desultory manner.


TNIT: Dream job as a kid: inventor or professor?


Lerner: Cannot really remember, but probably an astronaut!


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